Annuity FYI Blog

Many retirees right now are spending their money too quickly, according to The Wall Street Journal’s “Will Your Savings Run Out in Retirement?”  Anne Tergesen’s article offers suggestions to find out how much money you can spend each year without depleting your nest egg too soon.  Fidelity Investments touts annuity products as a good way to bridge the gap between social security, 401k’s and other retirement income.  Since many retirees are wary of hiring a financial advisor even though they are concerned about their retirement finances, some top companies are offering free or low-cost services to help you get your finances in order.

One of the most accessible services is Fidelity’s Income Strategy Evaluator.  You can find information on their website, at any branch, or through a toll-free phone number.  They offer advice on avoiding the longevity risk by estimating how much money you can spend each year without depleting your savings.  Whether you need information on a 401k annuity transfer or the best immediate annuities to carry your savings through retirement, Fidelity Investments has someone to assist you.  Charles Schwab Corp. offers their clients a Retirement Planning Consultation.  Companies like T. Rowe Price, Financial Engines Inc., and Morningstar, Inc. all have information to offer 401k and other retirement plan members.  There is advice out there for everyone.

MetLife is one of the top life insurance companies, and their annuity products are a big reason why.  According to “MetLife Annuities See Positive Outlook” by Errol Baddoo of the Annuity News Journal, the company’s annuity sales are soaring.  While they didn’t take first place in annuity sales in 2010, MetLife’s annuity sales of almost $21 billion made the top 5.  Their variable annuities sold $18 billion in 2010, a 19% increase from 2009.  While fixed annuity sales declined by 65%, they still accounted for around $2 billion in sales for MetLife.  Fixed annuities skyrocketed in popularity during the recent economic crisis because of their stability in a volatile marketplace.  As the economy has improved and variable annuities have increased in popularity, it only makes sense to see somewhat of a decline in fixed annuity sales.

MetLife’s newest variable annuity, a joint force with Fidelity Investments, is called the MetLife Growth and Guaranteed Income variable annuity.  In its first 12 months in the marketplace, this new variable annuity accounted for $1 billion in sales.  Some of MetLife’s other products include multiple annuity offerings like the 401k annuity, life insurance, other insurance plans, and a plethora of other retirement plan options.  Their biggest competitors are AIG, Hartford Financial, and Prudential Financial, the last of which took the top spot in annuity sales in 2010 with $23 billion.  MetLife’s stock value of $48.83 is 10% higher than the current market price, according to the Trefis stock price estimate.  Annuity products make up around 17% of the stock value for MetLife.  The company expects their newest variable annuity and other annuity products to add even more sales in 2011.

The next entry in our series of Real World Scenarios follows, regarding the taxes on death benefits.

I am the beneficiary of my deceased aunt’s annuity. Why do I have to pay taxes on it?

The answer is that the IRS wants their taxes (at least eventually) and they will tax any money that hasn’t previously been taxed! Let me give you some examples.

Suppose your aunt funded her annuity with non-qualified, or after-tax, money: money that was left over from her paycheck after the IRS took its share. In this case you will be subject to taxes on the gain, or increase in value of the annuity, since the gain has never been taxed (only the principal). The IRS would tax the gain in your tax bracket as you withdraw it (you don’t have to withdraw the total amount at once — see below).

Or, suppose your aunt funded her annuity with qualified, or before-tax, money: money in a 401k transferred to a 401k annuity, 403b, IRA, etc. In this case the IRS would tax 100% of this money since it has never been taxed before. Again, the tax would be based on your tax bracket as it is withdrawn.

If your aunt passed away within the last twelve months, your can choose to be paid incrementally over a period of five years (minimum), your lifetime, or anywhere in between, thus spreading out the tax burden over a longer period of time. If your aunt passed away more than a year ago, you can still take the money out over the next five years, creating a type of five-year forward averaging, thus reducing the tax burden and possibly lowering the bracket at which the taxes are paid. If you choose this last option you can take more, less or nothing in any given year as long as the annuity is completely distributed over the five-year period.

Find out from the insurance company what the original basis is on your aunt’s annuity — that will help you to make a more informed decision. If you want to discuss in person with an Annuity FYI Expert, please do not hesitate to contact an Annuity FYI Expert for more information.

According to The Street article “Putnam CEO Wants Annuity Oversight Agency” by Joe Mont, Putnam Investments’ CEO would like an agency similar to the FDIC in charge of lifetime income products like annuities.  Not only would he like the agency to oversee these investments, he would also like it to insure the products like the FDIC insures the money in banks.  CEO Robert Reynolds even named the fictitious agency the Lifetime Income Security Agency and he is calling on Congress to adopt his idea.  The agency would have the power to approve or deny all lifetime income products sold in the U.S.

It’s not that far-fetched of an idea, especially since the federal government, under President Obama’s lead, has been pushing Americans to secure their retirement with lifetime income products like the 401k annuity.  As we live longer, many retirees are facing three or more decades of retirement in which they need income to sustain their lifestyles.  He points out that overall sales of annuities have been relatively flat, partially because investors are wary to put so much money in one company whose guarantee lasts only as long as they are in business.  While choosing a top company takes a lot of that risk away, Reynolds argues that government insurance would help bring many more investors to the lifetime income of products like annuities.

Unfortunately some investors are turned off from these excellent investments because of stories they have heard about a few bad companies selling products that were too good to be true and not following through on their promises.  With a government agency overseeing those in the lifetime income business, only legitimate companies and good products would be approved.  This could greatly increase the consumer trust level for products like annuities, draw-down funds, and guaranteed pay-out plans.  Products like these, especially when they have death benefits, can carry Americans through a long lifetime without the worry of how they will pay their expenses in retirement.

There are two reasons for an increase in annuity purchases, according to Mark Huffman of Consumer Affairs.  His article “Should You Consider An Annuity?” says that the stock market collapse in 2008-2009 led many people to annuities.  After losing a significant chunk of their investments, investors sought products with less risk and more guarantees.  Annuity products are still meeting those needs, especially for risk-averse investors.  The retiring Baby Boomer generation is the second reason annuity purchases have been on the rise.  As Baby Boomers age, they are looking for stable income sources, especially if their retirement portfolios aren’t all they hoped.  401k annuity transfers allow Baby Boomers to take their work savings and guarantee a lifetime stream of income off which they can pay basic living expenses.

Investors have the choice of fixed annuities, variable annuities, and even an equity indexed annuity.  You also choose whether you would like your annuity payments to be deferred or begin immediately.  The length of time you’ll receive payments can be for a fixed time frame such as twenty years, over your lifetime, or in the case of a death benefit annuity they can last as long as your spouse’s lifetime.  You are usually guaranteed a certain minimum return by the insurance company issuing your annuity.  Since they are taking on the risk that investors want to avoid, the rate of return may be lower than some other products.  But the popularity of annuities has brought some good competition to the marketplace as well.  For those investors who annuities work well for, their payments will be based on their initial investment, the age at which they receive payments, and their rate of return.